Ordinary Iranians to suffer due to abolition of subsidized exchange rate

Iranian lawmakers recently confirmed that the government’s decision to revoke Iran’s subsidized exchange rate system will adversely impact medicine and healthcare in the country. Despite the significance of the decision, the Majlis announced that it was the government’s prerogative, only putting in place some meaningless conditions. The preferential subsidized exchange rate has helped in importing affordable medicine and healthcare supplies from abroad. But the parliament approved the elimination of this exchange rate — a step described on social media platforms as the “premeditated mass murder of the Iranian people.” This blow will be especially harsh as it comes just as the Statistical Center of Iran announced that the country last month witnessed the third-highest inflation rate since the 1979 revolution, with health insurance falling short of covering millions of Iranians.
The stated reason for the government’s decision was to “eradicate the corruption of importers who had used the subsidized exchange rate for purposes other than those for which it was created” and preserving Iran’s already scarce foreign currency reserves. It is worth mentioning that the Central Bank’s governor announced a few days ago that securing hard currency had become easier over the past year, claiming that the country’s hard currency reserves have increased by 57 percent, reaching more than $57 billion from oil and non-oil exports.
The subsidized exchange rate meant that the government offered a special exchange rate for the dollar — far lower than the market exchange rate, where one dollar is valued at more than 26,000 tomans. The subsidized exchange rate meant that the dollar was valued at 4,200 tomans. The Iranian currency has suffered several major setbacks over the past four years, losing 75 percent of its value, with the exchange rate to the dollar rising from less than 5,000 tomans four years ago to more than 26,000 tomans and sometimes above 30,000 tomans.
Among the meaningless conditions proposed by the parliament in response to the abolition of the subsidized exchange rate was that insurance companies should be compelled to meet the difference between the old and new prices. Lawmakers also proposed that prices would be fixed according to those posted between March 2021 and March 2022.
At first glance, the conditions set by parliament seem unrealistic. The proposal to fix prices in line with the past year and not increase them is an impractical condition. How can producers keep prices unchanged while the cost of raw materials and production inputs continuously rise? Of course, there will be no incentive for producers to continue production in case they incur losses, which will lead to medicines becoming scarce. This applies in the case of domestically manufactured medicines using imported components.
In the case of importing already-produced medicine from abroad, the situation will be even worse because the exchange rate of foreign currency on the free market is unstable and has been shooting upwards over the past three years, meaning massively increased costs for importers should the toman’s value increase in the future. This, in turn, will lead to increasing costs for patients. If the prices are fixed, both traders and producers will not be able to sell at prices that compensate for the costs incurred, which will ultimately create a black market for medicine.
Despite medicines being exempt from US sanctions, the medicine and healthcare sectors have suffered several crises since the sanctions were imposed. Iranians have suffered severe shortages in some types of medicine over the past two years, especially those used for treating chronic and incurable diseases, with Iran also devastatingly affected by a scarcity of the medical supplies needed to combat the COVID-19 pandemic. Many global drug companies — as well as Iranian medical personnel — have fled the country, which has prompted the regime to rely on 120 local companies to produce medicine. Nonetheless, the remaining medical companies in Iran still need to import raw materials from abroad to manufacture drugs domestically. With exchange rates subsidized, these companies were able to keep prices affordable, hence producing drugs and other medical items at a cost manageable to citizens.

Government’s move will put even more pressure on already-stressed patients and may cause several insurance companies to go bankrupt.

Dr. Mohammed Al-Sulami

As for the proposal that insurance companies pay the price difference, the matter is not that simple. There are two major problems. First, there are millions of Iranians left out of the health insurance network. The second is whether the insurance companies will be able to bear the significant difference between the old, subsidized exchange rate and the new one.
According to health insurance coverage tallies, there are between 6 million and 9 million Iranians not covered by health insurance, while 25 percent of medicine and healthcare products are not covered by health insurance. Accordingly, many Iranian specialists in the healthcare sector believe that abolishing the subsidized exchange rate will put even more pressure on already-stressed patients and may cause several insurance companies to go bankrupt because of the price shock. This will leave the people, especially the poor and vulnerable, without affordable healthcare and cause a crisis in insurance coverage in case the government does not intervene to compensate the insurance companies.
Even when the government was offering the subsidized exchange rate in the past, Iranians suffered from inflated food and medicine prices, with the continued rise in the dollar exchange rate further exacerbating inflation. The price hikes surpassed 60 percent on many occasions, affecting medicine, food, restaurants and housing in particular over the past year. According to the Statistical Center of Iran, inflation in health and medication was 40 percent in January 2022, while the inflation rate for the year ending in March reached 40.2 percent. Food and beverages posted an inflation rate of 51.9 percent. Citing these rates gives us a picture of the dizzying levels that prices could soon reach as a result of abolishing the subsidized exchange rate. This could be devastating for crucial and sensitive sectors such as medicine and healthcare — and there is no clear plan for protecting the Iranian people from the consequences.
In remarks to the ILNA news agency, Alireza Mahjoub, secretary-general of the Workers’ House, said: “It seems that the government didn’t conduct studies before making such a decision. The parliament didn’t assign a mission or plan for the government to act following the elimination of the subsidized exchange rate, except allowing it to freely spend the billions of dollars resulting from eliminating the subsidized exchange rate at will.” He expects that the price of medicine will increase more than 100 percent, adding that “this decision came at a time when our experts, not the government’s, estimated the minimum level of the subsistence basket to be at 9 million tomans per month.” Workers’ monthly wages in Iran are far less than half of this rate.
Iran’s economic decision-makers are in disarray, to the extent that one outgoing government issues a decision that the incoming government immediately abolishes, with the next government reinstating the previously revoked decision, and so on. At times, subsidizing commodities is the best solution to subsidize the Iranian economy, while at others cash subsidies are the best solution — a policy pursued by former President Mahmoud Ahmadinejad but curbed by his successor Hassan Rouhani, whose government instead introduced the subsidized exchange rate, which Ebrahim Raisi’s government has decided to eliminate.
Such chopping and changing of policies prevents any sort of long-term planning, with the ordinary people bearing the brunt in the end. The disarray this time has impacted a sensitive and important sector, that of healthcare, with middle and working-class citizens the worst affected. It is worth noting that Shah Mohammed Reza Pahlavi was aware of the importance of healthcare at the end of his reign and gained some popularity for his policies in this field, such as expanding health insurance coverage to include all Iranian citizens and providing free food items for mothers and babies.

• Dr. Mohammed Al-Sulami is President of the International Institute for Iranian Studies (Rasanah).
Twitter: @mohalsulami